The critical role of ‘conventional beliefs’ in economics

This article examines the role of ‘conventional beliefs’ in economics, defined as shared expectations about how the economy functions. These beliefs significantly influence decision-making by the agents and affect the response of the economy to shocks. The article specifically considers a Walrasian Conventional Belief (WCB) and a Keynesian Conventional Belief (KCB). Under the WCB, agents take price and quantity changes to signal adjustments toward the optimal equilibrium. Under the KCB, agents take price and quantity changes to signal changes in demand. The article shows that if a KCB takes hold in a neoclassical context, it shapes economic responses to shocks and leads to Keynesian outcomes (in terms of aggregate resource uses). It also shows that if the same shock were to hit the same economy, the shock would be more persistent and intense under the KCB than under the WCB. The article suggests that policies promoting nominal stability can help stabilize expectations and support full employment; however, it cautions against over-reliance on fiscal and monetary interventions in structurally weak economies. The article concludes by contrasting the theory of conventional beliefs with key concepts from New Classical and New Keynesian economics, along with remarks on the formation and evolution of conventional beliefs.